How to Invest in Raw Land

Farmland and development properties are two ways to invest in raw land.

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It has been said that real estate, particularly land, is a solid investment because the supply is limited -- nobody is producing any more. Although the growth of population seems to guarantee that land prices will increase, making it a good investment, you must be careful and follow a method for your land purchases. Land may also make a good Individual Retirement Account investment.

Land for Houses

Vacant property that you purchase with the intention of developing by building houses or commercial property is one way to invest in raw land. You can purchase a house lot in an existing subdivision, with the intention of holding on to it and selling it later at a profit. A real estate broker can assist you in finding these types of properties, which will often sell at a premium. You can also focus on larger tracts of land and work to develop these properties for residential or commercial use on your own. By completing site plans and other infrastructure development, you can increase the value in the property to a potential investor.

Growing Food

Farmland is another type of raw land that can produce good returns on your investment. According to Jeff Notaro, CEO of Black Sea Agriculture, a farmland-investing limited partnership, U.S. farmland prices increased by 270 percent from 2002 through 2011. Worldwide population growth and increased demand for food are expected to continue to drive farmland investment growth. Although you can purchase a working farm to invest in raw farmland, you can also purchase the raw land in large tracts and rent it to farmers to grow food on. In addition, you can purchase stocks in companies that invest in raw farmland if you do not want the hands-on management that goes with the actual ownership of the property.

Financing your Purchase

Financing a raw land purchase for investment is different than financing a home purchase. The bank has more risk with this type of loan, as the owner is not using the raw land and will be more likely to walk away from the property in case of financial problems. Many banks will not lend money to purchase raw land. The ones that do often require much higher down payments on raw land loans, higher interest rates and shorter terms for the loans. A down payment as high as 50 percent can be common, with the bank requiring a decent amount of cash reserves as well.

Land Retirement Investing

You can also purchase land inside of a self-directed IRA. You can start a self-directed IRA by transferring funds from other retirement accounts to an account you set up with a self-directed IRA trustee. Then, you can direct your trustee to purchase raw land in the name of the IRA. If you later sell the property at a profit, you defer the taxes on the profit until you withdraw the money from the IRA.

Potential Problems

Raw land produces its potential return on investment through capital gains. Although these gains enjoy preferred tax treatment, you can have cash outlays on your raw land investment before you sell the property at a gain, resulting in a negative cash flow. Expenses such as property taxes and insurance must be paid regardless of the investment performance of the land. With an IRA land investment, these funds must come from the IRA account -- you cannot pay these with non-retirement funds. This will reduce the yearly return on your IRA, and you must maintain cash in your IRA to pay these expenses.